The IRS has extended the deadline for amending many defined benefits pension plans under Internal Revenue Code Section 436. Section 436 was added by the Pension Protection Act of 2006 (“PPA”) and provides a series of limitations on the accrual and payment of benefits under an underfunded plan. (For more information, see Your Defined Benefit Pension Plan May Need Amending Prior to December 31, 2012.)  At the end of November, the IRS extended the deadline for this amendment to the last day of the first plan year that begins on or after January 1, 2013. For more information, see IRS Notice 2012-70.

With Thanksgiving only two days away, the Departments of Health and Human Services, Labor and the Treasury (collectively, the "Departments") jointly released proposed rules on wellness programs to reflect the changes to existing wellness provisions made by the Affordable Care Act (ACA). The proposed rules would be effective for plan years starting on or after January 1, 2014.

The proposed rules would retain many of the existing rules pertaining to "participatory wellness programs" (generally, programs providing rewards without regard to an individual’s health status) and "health-contingent wellness programs" (generally, programs that require individuals to meet a specific standard related to their health to obtain a reward). However, the Departments propose a number of changes, some of which are summarized below. They also seek comments from employers and others on a range of issues concerning wellness programs which must be submitted approximately 60 days from the date of this post.

What are some of the key changes:

  • In addition to implementing the statutory change in the ACA that increases the maximum permissible reward under a health-contingent wellness program from 20 percent to 30 percent of the cost of health coverage, the Departments would further increase the maximum reward to 50 percent for programs designed to prevent or reduce tobacco use.
  • If a reasonable alternative standard is an educational program, the plan cannot require individuals to find such a program on their own, nor may the plan require individuals to pay for the program. Similarly, in the case of diet programs, while the plan does not have to cover the cost of food, it must pay the cost of admission to the program.
  • The Departments would continue to permit employers to obtain physician verification that an individual’s health factor makes it unreasonably difficult for the individual to satisfy, or medically inadvisable for the individual to attempt to satisfy, the otherwise applicable standard, provided doing so is reasonable as required under the ACA. The regulations propose that it would not be reasonable for a plan to seek verification of a claim that is obviously valid based on the nature of the individual’s known medical condition.
  • In order to be reasonably designed to promote health or prevent disease, where the initial standard for the reward is based on a measurement, test or screening, programs would be required to offer a different, reasonable means of qualifying for the reward to any individual who does not meet the standard based on the measurement, test or screening.
  • The proposed regulations also confirm that adverse benefit determinations dealing with whether a participant or beneficiary is entitled to a reasonable alternative standard for a reward are situations eligible for Federal external review under the ACA claims and appeals procedures.
  • The Departments would also provide new language to communicate to program participants the opportunity for a reasonable alternative to achieving the reward under the program:

Your health plan is committed to helping you achieve your best health status. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you to find a wellness program with the same reward that is right for you in light of your health status.

Over the past few years, many employers have implemented wellness programs hoping to provide employees opportunities to enhance their health, manage unhealthy behaviors and control plan costs. The Departments are hopeful that once final the regulations will provide clarity to some of the biggest challenges facing wellness programs, although some critical issues remain for employers, including the effects of other laws, such as the Americans with Disabilities Act, the Genetic Information Nondiscrimination Act, federal and state privacy laws, and off-duty activity laws. For this reason, employers may want to take advantage of the opportunity to submit comments concerning these programs in the hope of shaping the law to suit their needs. 

Under Internal Revenue Code Section 436, which was added by the Pension Protection Act of 2006 (“PPA”), calendar year defined benefit pension plans must be amended by December 31, 2012. Section 436 provides a series of limitations on the accrual and payment of benefits under an underfunded plan.

The provisions of Section 436 apply only to significantly underfunded pension plans. However, all defined benefit plans must be amended to reflect these benefit restriction provisions. The amendment period was extended by the Internal Revenue Service from 2009 to the last day of the first plan year that begins on or after January 1, 2012, i.e., December 31, 2012, for calendar year plans.

Most plan sponsors adopted PPA amendments in 2009. Those PPA amendments may not have included the benefit restrictions required by Code Section 436 because the IRS extended the deadline for adopting the benefit restriction amendments.

In December 2011, the IRS issued Notice 2011-96, which included IRS model language as a safe harbor for the Code Section 436 provisions. Even employers who previously adopted the Code Section 436 benefit restriction provisions with their PPA amendments should consider amending their plans to adopt the IRS’ safe harbor model language. Upon an IRS audit or the next IRS determination letter application review, the adoption of this safe harbor language will be helpful and will avoid the risk that an amendment adopted to comply with Code Section 436 does not actually comply with the Internal Revenue Code requirements. Of course, for those plans that have not adopted Code Section 436 benefit restriction provisions at all, the safe harbor model language should be adopted in a timely manner.

Events like Hurricane Sandy often leave companies and employers scrambling for ways to assist those affected by the storm, including the company’s employees and their families. Below are some of the ways employers are stepping up.

Leave Sharing Programs. In the aftermath storms like Hurricane Sandy, generous employees often want to step up and share their paid leave with employees adversely affected by the storm. Employers can set up leave sharing banks to allow donated paid leave to be used by employees that need time off on account of the storm. IRS Notice 2006-59 provides guidance for setting up these programs to avoid adverse tax consequences.

Below are some of the key requirements needed for a leave sharing program to qualify under IRS Notice 2006-59:

  • The leave must be used by employees who have been adversely affected by a "major disaster," as declared by the President under Section 401 of the Stafford Act, 42 USC Sec. 5170. Hurricane Sandy has received that designation in a number of states.
  • The program may not allow donors to transfer leave to specific recipients.
  • Leave recipients may not convert leave received under the program into cash.
  • Leave under the program must be used for the disaster.
  • Leave deposited in the bank for one disaster may only be used for that disaster.

If these and other requirements under the Notice are satisfied, the IRS will not treat a leave donor as realizing income or receiving wages, compensation, or rail wages with respect to the deposited leave. This also assumes that donated leave received by the recipient will be treated as “wages” for purposes of FICA, FUTA, and income tax withholding, and as “compensation” for purposes of RRTA and “rail wages” for purposes of RURT, unless excluded under a specific Code provision. Leave donors may not claim an expense, charitable contribution, or loss deduction on account of the deposit of the leave or its use by a leave recipient.

State leave laws also need to be consulted when implementing these programs.

Employer Provided Disaster Relief. On November 2, 2012, the IRS also alerted employers that because Hurricane Sandy is designated as a qualified disaster for federal tax purposes, qualified disaster relief payments made to individuals by their employer or any person can be excluded from those individuals’ taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.

The IRS also announced that the designation of Hurricane Sandy as a qualified disaster means that employer-sponsored private foundations may provide disaster relief to employee-victims in areas affected by the hurricane without affecting their tax-exempt status.

Leave-based donation program. For past events similar to Hurricane Sandy, the IRS announced in Notice 2005-68 that it would not treat cash payments employers make to certain charitable organizations in exchange for employees’ paid-time-off as gross income of employees if payments are made to relief of victims of the disaster, in that case Hurricane Katrina, and are paid before a certain date.

Employees who elected to give up paid leave for this purpose could not deduct the value of paid-time-off donated as charitable contributions. If these rules were followed, the IRS won’t assert that opportunity to make this election is constructive receipt of income. Whether the IRS will make a similar announcement for Hurricane Sandy remains to be seen. Again, state leave laws also need to be consulted when implementing these programs.

Just like many employers, Broward County, FL adopted a wellness program designed to encourage its employees to participate in certain health screenings. One concern all employers have concerning these programs is whether the ADA’s prohibition on non-voluntary medical examinations and disability-related inquiries makes these programs unlawful. The Eleventh Circuit, in Seff v. Broward County, FL, found that not to be the case here, applying a separate "safe harbor" provision of the ADA. 

This case is an important victory for employers with workplace wellness programs, but it by no means settles all of the potential legal risks these programs face. Employers with wellness programs, particularly for those programs that are more robust in terms of the incentives they provide and the requirements employees have to meet to achieve those incentives, will continue to have to monitor other courts’ application of the ADA, as well as HIPAA, GINA, and other federal and state laws that affect wellness program design and administration.

Under the County’s program, a typical design adopted by many employers, employees receive $20 for participating in a “finger stick for glucose and cholesterol,” and an online Health Risk Assessment questionnaire which are used to identify Broward employees who had one of five disease states: asthma, hypertension, diabetes, congestive heart failure, or kidney disease. Employees suffering from any of the these would be able to take part in disease management programs.

A former employee sued claiming the assessment questionnaire violated the ADA’s prohibition on non-voluntary medical examinations and disability-related inquiries. The 11th Circuit rejected this argument, and agreed with the lower court’s decision that ADA’s safe harbor provision for insurance plans exempted the employee wellness program from any potentially relevant ADA prohibitions. That safe harbor states that the ADA “shall not be construed” as prohibiting a covered entity

from establishing, sponsoring, observing or administering the terms of a bona fide benefit plan that are based on underwriting risks, classifying risks, or administering such risks that are based on or not inconsistent with State law.

In an attempt to create a question of fact, the employee raised testimony in the case concerning whether the wellness program was part of the bona fide health plan. The Court did not agree and noted that it was not "aware of any authority suggesting that an employee wellness program must be explicitly identified in a benefit plan’s written documents to qualify as a “term” of the benefit plan within the meaning of the ADA’s safe harbor provision." Instead, the Court was satisfied that the wellness program was as part of the contract to provide Broward with a group health plan, the program was only available to group plan enrollees, and Broward presented the program as part of its group plan in at least two employee handouts.

The Court may have taken this position because Broward is a governmental plan, not subject to ERISA. However, we recommend that employers with similar designs include descriptions of their wellness programs in their group health plan documents. 

Wellness programs continue to be popular as employers implement them to spur employees to adopt healthier behaviors. Massachusetts employers that adopt wellness programs for their employees may soon be eligible for a tax credit of up to $10,000 under a law passed in the legislature (S. 2400) on July 31, which Gov. Deval Patrick has indicated he would sign.

If signed into law, the Massachusetts wellness program tax credit would be equal to 25 per cent of the costs associated with implementing a program certified under state law, with a maximum credit of $10,000 per business each year. The Bay State’s Department of Public Health would need to establish eligibility criteria for the wellness programs employed and a reporting mechanism for employers.

Other states have taken similar steps to encourage wellness programs. For example, Indiana‘s Small Employer Qualified Wellness Program Tax Credit provided a state tax credit of 50 percent of the costs of providing a qualified wellness program to employees. However, a moratorium was placed on the credit during the 2011 legislative session. In Ohio, employers can apply for a grant under the Workplace Wellness Grant Program. 

Whether or not an incentive is available to maintain a wellness program, employers that adopt them also must consider the legal and compliance risks inherent in many wellness program designs. The law related to wellness programs is significantly underdeveloped and these programs sit at the crossroads of a number of significant laws, such as the Americans with Disabilities Act (ADA), the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA), the Genetic Information Nondiscrimination Act (GINA), as well as other federal and state laws. Careful design and implementation is critical.  

On July 30, 2012, the Department of Labor issued FAB 2012-02R as a revised version of FAB 2012-02 (issued May 7, 2012), which supplements the participant-level fee disclosure regulation and how it may be implemented. (See our prior post regarding FAB 2012-02.)

Q&A 30 of FAB 2012-02 generated significant controversy as it appeared to introduce new rules without following established rulemaking procedures (i.e., including a new requirement in a proposed regulation with an opportunity for interested parties to comment). Q&A 30 stated, in part, that:

If, through a brokerage window or similar arrangement, non-designated investment alternatives available under a plan are selected by significant numbers of participants and beneficiaries, an affirmative obligation arises on the part of the plan fiduciary to examine these alternatives and determine whether one or more such alternatives should be treated as designated for purposes of the regulation. (emphasis added)

Many industry trade organizations went “wild” in response to this requirement as recordkeeping systems currently do not collect this information with respect to participants who invest through open brokerage windows. Creating such a system would take a significant amount of time and most certainly could not be completed by the August 30, 2012 deadline to distribute annual disclosures to participants.

In the revised FAB 2012-02R, Q&A 30 has been replaced by Q&A 39. Q&A 39 does not include the affirmative obligation to determine if one or more investments available under a brokerage window or similar arrangement is a designated investment alternative. Q&A 39 indicates that (i) a brokerage window or similar arrangement is not a designated investment alternative, (ii) a plan is not required to have a particular number of designated investment alternatives, (iii) the FAB does not prohibit the use of a platform or a brokerage window, self-directed brokerage account, or similar plan arrangement in an individual account plan, and (iv) the FAB does not change the 404(c) regulation or the requirements for relief from fiduciary liability under section 404(c) of ERISA.

However, Q&A 39 concludes with a promise from the Department of Labor that it intends to “engage in discussions with interested parties to help determine how best to assure compliance” by fiduciaries with ERISA’s general fiduciary standards “in a practical and cost effective manner, including, if appropriate, through amendments of relevant regulatory provisions.” Thus, although Q&A 39 has temporarily relieved plan administrators from certain fee disclosure obligations with respect to brokerage windows and similar arrangements for now, things may change in the future.

Take away – If your plan includes a brokerage window or similar arrangement, you do not have to consider eliminating it now to avoid compliance problems. However, you should keep abreast of changes in the rules as the Department of Labor may issue regulations in the future implementing the guidance that was originally included in Q&A 30.

Now that the July 1, 2012 deadline has passed for ERISA “covered service providers” to inform “responsible plan fiduciaries” about the services performed for their retirement plans and the investment management, recordkeeping, and other fees charged to those plans, it is time for employers and other plan fiduciaries to take action.

First, plan fiduciaries must review the information provided by the covered service providers. If any information appears to be missing or is incomplete, a plan fiduciary must request the missing information from the covered service provider in writing. If the information is not provided within 90 days, the plan fiduciary will need to notify the Department of Labor. In addition, plan fiduciaries must analyze all of the information provided by plan service providers. If a fiduciary does not conclude that the service provider’s fees are reasonable for the services it performs, the fiduciary must take appropriate action, such as negotiating lower fees or finding a new service provider.  This review and analysis process must be documented in order to demonstrate fulfillment of one’s fiduciary duties.

In addition, the plan administrators of individual account plans (usually, the employers sponsoring the plans) need to begin compiling the information that is required to be provided to participants by August 30, 2012. Some of this information will come directly from the disclosures provided by covered service providers. For example, with respect to designated investment alternatives, covered service providers are required to disclose the total annual operating expenses, calculated in accordance with the participant disclosure regulations. Plan administrators should keep in mind that, although the covered service providers are required to provide much of the information that is to be passed along to participants, the plan administrators have the ultimate responsibility to provide the required fee information to participants.

Plan administrators must take time to analyze the information that will be disseminated to participants. In addition, plan administrators should anticipate participant questions and be ready to respond on short notice once the disclosures are delivered.

Finally, plan administrators need to gear up to deliver the quarterly notices. The first quarterly notice is due by November 14, 2012.

On May 29th, the IRS issued proposed regulations relating to property transferred in connection with the performance of services under Section 83 of the Internal Revenue Code. http://www.ofr.gov/OFRUpload/OFRData/2012-12855_PI.pdf . Most employers are familiar with these rules in the context of the taxation of restricted stock grants and option grants. Under Section 83, property transferred as com pensation is generally taxed only when the substantial risk of forfeiture lapses (i.e., when the transferred property “vests”).

According to the IRS, these proposed regulations are intended to “clarify” the application of the Section 83 rules. We agree with the IRS that these proposed regulations are mere clarifications and do not significantly change current understanding of the application of Section 83.

These proposed regulations are proposed to apply to property transferred on or after January 1, 2013, but may be relied upon now.

The Clarifications

First, the IRS indicates that the proposed regulations are intended to clarify that a substantial risk of forfeiture may be established ONLY through a service condition (e.g., where an employee receives property from an employer subject to a requirement to continue working through a fixed date in order to retain a property award) or a condition related to the purpose of the transfer (e.g., where an employee receives property from an employer subject to a requirement that it be returned if the total earnings of the employer do not increase). Apparently, the IRS is concerned that taxpayers believe other conditions may establish a substantial risk of forfeiture and that it needs to clarify that only these types of conditions will constitute a substantial risk of forfeiture.

Second, the IRS clarifies that in determining whether a substantial risk of forfeiture exists, taxpayers need to evaluate the likelihood that any condition related to the purpose of a transfer will actually occur.  For example, where stock transferred to an employee is nontransferable and subject to a condition that the stock be forfeited if employer gross receipts fall by 90% over the next 3 years, if this result is extremely unlikely to happen the stock will not be deemed to be subject to a substantial risk of forfeiture. While this example is easy to apply, it is not clear if a more borderline restriction, such as a condition that stock be forfeited if employer gross receipts fall by 15% or 20%, will constitute a substantial risk of forfeiture under this clarification.

Third, the IRS clarifies that transfer restrictions alone do not create a substantial risk of forfeiture. This clarification is consistent with our general understanding of the application of Section 83.

Finally, consistent with Revenue Ruling 2005-48, the IRS clarifies that the only provision of the securities laws that would defer taxation under Section 83 is Section 16(b) of the Securities Exchange Act of 1934. Thus, other transfer restrictions, such as restrictions imposed by lock-up agreements or restrictions relating to insider trading under Rule 19b-5 of the Securities Exchange Act of 1934 will not defer taxation of the property subject to those restriction.

Take Away

Although the proposed regulations do not make any drastic changes to the application of Section 83, they do provide some clarifications to the IRS’s position regarding Section 83. Employers may want to review their equity plans and other plans subject to Section 83 to ensure that the plans are compliant with Section 83, as clarified.

The Internal Revenue Service (IRS) has provided guidance regarding the new salary reduction contribution limits to health flexible spending arrangements (health FSAs) under Internal Revenue Code section 125 cafeteria plans in Notice 2012-40, issued May 30, 2012.

Currently, there are no statutory limits on employee salary reduction contributions to health FSAs, but plan sponsors typically impose limits on the amount of salary reduction contributions that employees may elect to make to health FSAs. However, this will change when Code section 125(i) becomes effective. Code section 125(i) (added by the 2010 health care reform law) imposes a $2,500 annual limit on health FSA salary reduction contributions. The Notice clarifies that this new statutory limit is effective for plan years beginning after 2012.

In addition, Notice 2012-40 further clarifies that the limitation only applies to salary reduction contributions under health FSAs and does not apply to certain employer non-elective contributions, i.e., flex credits, or to any types of contributions or amounts available for reimbursement under other kinds of FSAs, health savings accounts, or health reimbursement arrangements or to salary reduction contributions to cafeteria pans that are used to pay an employee’s share of health coverage premiums. Moreover, run-out amounts available during the grace-period following a plan year will not count against the $2,500 limit for the subsequent year.

Cafeteria plan sponsors have until December 31, 2014, to adopt any amendments necessary to conform their cafeteria plans to the requirements of new Code section 125(i). The Notice advises that retroactive adoption of amendments for this purpose is permitted provided that the cafeteria plan operates in accordance with the requirements of section 125(i) for plan years beginning after December 31, 2012. Failure of a cafeteria plan to conform to the requirements of section 125(i) after December 31, 2012, will result in the value of the taxable benefits that an employee could have elected to receive during the plan year being includable in the employee’s gross income for the year, regardless of the benefits actually elected by the employee.

Significantly, the IRS is taking comments, through August 17, 2012, regarding whether the “use-or-lose” rule for health FSAs should be modified to allow for more flexibility. Any employer interested in submitting comments should act on this opportunity quickly. Jackson Lewis attorneys are available to assist in submitting comments as well as amending plan documents.